Question

Estimated Income Statements, using Absorption and Variable Costing Prior to the first month of operations ending October 31 Marshall Inc. estimated the following operating results: Sales (19,200 x $68) $1,305,600 Manufacturing costs (19,200 units): Direct materials 787,200 Direct labor 186,240 Variable factory overhead 86,400 Fixed factory overhead 103,680 Fixed selling and administrative expenses 28,200 Variable selling and administrative expenses 34,100 The company is evaluating a proposal to manufacture 21,600 units instead of 19,200 units, thus creating an Inventory, October 31 of 2,400 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses. a. 1. Prepare an estimated income statement, comparing operating results if 19,200 and 21,600 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank or enter “0”. Marshall Inc. Absorption Costing Income Statement For the Month Ending October 31 19,200 Units Manufactured 21,600 Units Manufactured $ $ Cost of goods sold: $ $ $ $ $ $ Income from operations $ $ a. 2. Prepare an estimated income statement, comparing operating results if 19,200 and 21,600 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank or enter “0”. Marshall Inc. Variable Costing Income Statement For the Month Ending October 31 19,200 Units Manufactured 21,600 Units Manufactured $ $ Variable cost of goods sold: $ $ $ $ $ $ $ $ Fixed costs: $ $ Total fixed costs $ $ $ $ b. What is the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement? The increase in income from operations under absorption costing is caused by the allocation of overhead cost over a number of units. Thus, the cost of goods sold is . The difference can also be explained by the amount of overhead cost included in the inventory. Check My Work

Answer 1

a. 1. Prepare an estimated income statement, comparing operating results if 19200 and 21,600 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank or enter “0”.
Marshall Inc.
Absorption Costing Income Statement
For the Month Ending October 31
	19,200 Units Manufactured	21,600 Units Manufactured
Sales	$       13,05,600.00	$      13,05,600.00
Cost of goods sold:
Cost of goods manufactured (see below)
19,200 units x $61	$       11,63,520.00
21,600 units x $60		$      12,96,000.00
Less: Inventory, October 31 (2400 x 60)		$        1,44,000.00
Total cost of goods sold	$       11,63,520.00	$      11,52,000.00
Gross profit	$         1,42,080.00	$        1,53,600.00
Selling and administrative expenses (28200+34100)	$            62,300.00	$           62,300.00
Income from operations	$            79,780.00	$           91,300.00
Cost of goods manufactured
Manufacturing costs	Total Cost	Cost Per Unit for 19200 units	Cost Per Unit for 21600 units
Direct materials	7,87,200	$                  41.00	$       41.00
Direct labor	1,86,240	$                    9.70	$         9.70
Variable factory overhead	86,400	$                    4.50	$         4.50
Fixed factory overhead	1,03,680	$                    5.40	$         4.80
Cost of goods manufactured:	11,63,520	61	60
a. 2. Prepare an estimated income statement, comparing operating results if 19,200 and 21,600 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank or enter “0”
Marshall Inc.
Variable Costing Income Statement
For the Month Ending October 31
	19,200 Units Manufactured	21,600 Units Manufactured
Sales	$       13,05,600.00	$      13,05,600.00
Variable Cost of goods sold:
Variable Cost of goods manufactured (see below)
19,200 units x $55	$       10,59,840.00
21,600 units x $55		$      11,92,320.00
Less: Inventory, October 31 (2400 x 55)		$        1,32,480.00
Total Variable cost of goods sold	$       10,59,840.00	$      10,59,840.00
Manufacturing margin	$         2,45,760.00	$        2,45,760.00
Variable selling and administrative expenses	$            34,100.00	$           34,100.00
Contribution Margin	$         2,11,660.00	$        2,11,660.00
Fixed costs:
Fixed factory overhead	1,03,680	1,03,680
Fixed selling and administrative expenses	28,200	28,200
Total fixed costs	1,31,880	1,31,880
Income from Operation	$            79,780.00	$           79,780.00
Manufacturing costs	Total Cost	Cost Per Unit for 19200 units
Direct materials	7,87,200	$                  41.00
Direct labor	1,86,240	$                    9.70
Variable factory overhead	86,400	$                    4.50
Cost of goods manufactured:	10,59,840	55
Variable selling and administrative expenses are constant with constant sales levels.
b. What is the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement?
The increase in income from operations under absorption costing is caused by the allocation of fixed factory overhead cost over a number larger of units. Thus, the cost of goods sold is less. The difference can also be explained by the amount of fixed factory overhead cost included in the ending inventory.